13 Fraud Prevention Tips

My last 13 posts have been specific tips designed to help you do a better job preventing fraud at your company. My hope is that by calling your attention to the variety of ways that people commit fraud and by sharing these anecdotes you’ll be proactive in putting in place checks and balances and sticking to the kind of no-nonsense fraud prevention policies that keep businesses healthy and safe.

Let this post serve as a reference for each of the 13 Fraud Prevention Tips I’ve offered, and please feel free to add your own.

1. If Someone Commits Fraud, Have Them Thrown in Jail

2. Leverage the Value of an Informal Fraud Policy

3. Fraud Prevention Tip: Keep Your Security Room Locked

4. Always Have Someone Double Check the Payroll

5. Change the Standard by Which You Check Your Transactions

6. Don’t Rehire People Who Steal From You – Seriously

7. Focus on Checks and Balances that are Rechecked and Rebalanced

8. Take All Shortages Seriously

9. Always Poke Around Your Books

10. Regularly Monitor and Review Monetary Trends

11. Match Your Purchase Orders Against Your Invoices Before Putting the Invoices in Your System

12. Think About the Financial Impact of Rare Events on Your Business

13. Trust Your Instincts

Someone asked me why I did so many posts on Fraud Prevention that they ran right out of March – Fraud Prevention Month – and all the way to the end of April. As I mentioned in my very first post about fraud this year, preventing fraud is a year-round process. You need to be vigilant all the time, building a system that is internally monitored – and that monitors the monitors.

Please let me know what your fraud stories are, what tips you’d add to my list and how you prevent fraud.

Fraud Prevention Tip: Take All Shortages Seriously

In businesses with checkout counters and cash drawers, it can be very easy to just accept a standard over/under on drawer counts. A number of other places that involve balancing books will also allow this to be so. I’m the first to say that if you’re balancing out $100,000 in revenue and find that you’re $86 off, you might just want to let it go as the trouble of uncovering that $86 is not worth the $86.

But what if someone had stolen that $86? Then would you want to know and figure out what had happened? Arguably, that changes the value of the $86, since this is unlikely to be a one time thing, but a recurring and growing “expense.”

So let’s say that you have a drawer that’s off by $14 one day. No big deal – that can happen, especially at a place that does enough business in cash on each drawer.

But let’s say that happens at a big department store like a Macy’s 5 days in a row. That cashier is going to get fired for one of two reasons. Either a. he’s an idiot or b. he’s stealing.

But let’s not forget to consider hidden option c. someone else is stealing from him because he’s an idiot.

Many employees know that a drawer can be off $20 a day without raising a lot of suspicion, and so they use other people’s cash drawers when their friends come in to the store and give them $10 too much change. By rotating whose drawers they’re doing this from, it makes it very hard to catch them. Watch for patterns and consistencies, like who’s regularly working on days that there are higher than usual collective shortages, even if those shortages don’t appear on their drawers.

Don’t jump to conclusions. Just be vigilant and chart the specifics of any inadequate drawer counts.

Many companies grow lax because everything’s been fine with their counts, but don’t make the mistake of ignoring the systems you have in place. You put them there for a reason.

On some level, you’ll have to make a judgment call on this one depending on the percentage under and who has his or her hands in your cash and your books. This tip isn’t as stark-raving obvious as don’t rehire people who steal from you, but I do want you to take all shortages seriously all the same.

What shortages are considered acceptable at your business? How frequently does that happen and what do you do about it?

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Fraud Prevention Tip: Don’t Rehire People Who Steal From You – Seriously

My lengthy post on the need to always prosecute those who steal from you included an exploration of those reasons that people fail to prosecute and how not doing so is a larger problem for the business world. Now I’m going to provide you with a very concrete story that I hope highlights why you always prosecute and why you never – ever – rehire people who steal from you.

I was once turning around a company at which a sales manager had a scheme with a customer.

The published sale’s price of this company’s primary widget was $8.50. The salesperson in question would place an order for a particular customer of his, ship the merchandise to the customer and then go to accounts receivable and put through a credit memo for that customer which would net the customer a price below the list price of $8.50. The customer would then slip the salesperson 50% of his savings. That is, the customer would pay $4.50 for the widget, thereby saving a total of $4/widget, half of which ($2) he would give back to the salesperson.

Because something like this can easily slip below the radar in a company with enough customers the financial impact might be minimal; thus, it’s very easy to go undetected for a while. The reason I discovered that this was happening was because the guy got greedy and started doing this with multiple customers. In his hastiness he put the credit through for the wrong company. The accounting department at that company was honest and came to us to disclose this erroneously applied credit. When we researched the credit we discovered what was happening, and the whole scheme unraveled.

As a result, this guy was fired (thank goodness) and never prosecuted (rats).

Apparently, this guy was an excellent salesperson, and even though he was ripping off the company for which he was working, he was simultaneously drumming up a remarkable amount of legit business. After he was fired the company’s sales declined by 25% over the next two years. Unsure of what to do and unable to find a suitable sales force to replace this one guy, the CEO rehired the once-thieving salesman (and as I always say, “Once a thieving salesman, always a thieving salesman”).

When asked why, the CEO said that the salesman had found God, repented for all of his sins and begged forgiveness. Though he never made monetary restitution for his misguided ways, he nonetheless apologized sufficiently enough for the CEO, who rehired him to return the company’s sales to a profitable level.

Lo’ and behold, six months later they (finally) put the salesman in jail because he started stealing again. Don’t make me say the following twice – please.

Do not rehire people who steal from you – ever.

This one is not a tip or a simple recommendation – I’m imploring you.

I believe in second chances in life. We all screw up at one point or another, and I dare say, we all deserve to find forgiveness. Despite that, do not rehire people who steal from you. If you think that you might not be able to keep to this because you’re such a forgiving person, then put it in your company’s bylaws to prohibit you from rehiring thieves despite your wishes otherwise.

Do not rehire people who steal from you. Seriously.

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Fraud Prevention Tip: Keep Your Security Room Locked

When I prepped you for this series on fraud, I mentioned that some of the tips were going to seem a little obvious. This opening tip should seem head-slappingly “duh,” but you’ll have to believe that the example is nonetheless true.

I was working on a company in Dallas where all the surveillance equipment was kept in one room. Logical, right? But delightfully for those interested in doing wrong by the company, this so-called surveillance room was kept unlocked all the time.

That may be fine in these days of digital data automatically uploaded to secure servers and kept for months, but this was back in the days of video cassettes – a time when the data was in one place at one time and easily destroyed.

As you can imagine, this place had a theft problem. And after people would steal something, he would walk right into the surveillance room, change the tape or erase it; and sometimes before committing a crime the thief would just stop the VCR for the duration of his crime.

So, my Fraud Tip:

Keep Your Security Room Locked.

Do not let this happen to you! Having security equipment is great, but you have to secure the security equipment.

Is your security room kept locked or unlocked? If you don’t know, please go check right now.

Fraud Prevention Tip: If Someone Commits Fraud, Have Them Thrown in Jail

One thing I consistently find to be true is that, from a legal perspective, 75% of people who are caught stealing and committing fraud are first time offenders. That’s not because it suddenly occurred to them that they could steal and supposedly get away with it; these are people who have been caught in the past but who were never prosecuted.

That’s right – people catch other people stealing money and inventory from them and don’t use the law to prosecute them, whether for restitution or punitive reasons.

Why Don’t People Prosecute?

People don’t prosecute for a few reasons.

1. It seems easy for us to say, “Oh my gosh. Someone was stealing from you? You had them arrested and sued them, right?” After all, if someone broke into your home and stole your grandma’s diamond necklace, you would sue them, wouldn’t you? Of course you would, but for some reason when people work for us and we feel like we know them, we want to forgive them and not mess up their lives, so we fire them – but we don’t prosecute. However, if people don’t go to jail, they don’t learn their lesson (this isn’t some legalistic philosophy I stick by – this is based on the experiences that I’ll flesh out more below and in future posts).

2. Prosecuting seems messy. It creates paperwork, involves lawyers, and it takes time, energy and more money, and you’d rather not lose more considering that someone’s been stealing it already, right? Wrong. You can get some of that money back if it can be had, and the mess is worth the trouble.

3. It’s embarrassing. People think it’s embarrassing that someone was stealing from them and they didn’t uncover it sooner. They don’t want other people to know, whether employees, the public, friends or family. They don’t want a big deal made, attention attracted, ill will and weird feelings. It seems icky somehow and people seek to avoid the associated feelings.

What Are the Consequences of Not Prosecuting?

When people don’t prosecute it hurts everyone and it’s bad for the larger business world. In the long run, when people prosecute it benefits everyone, from employers and industry to the average honest worker who deserves a job for which he’s not competing against thieves.

One of the biggest problems of not prosecuting those who steal and commit fraud is that you can’t say to their next potential employer that they’re thieves. Legally, if you fire someone for theft but don’t prosecute in a court of law, you can’t say that he’s a thief. That means you have to say that you chose to part ways amicably or you will be seen to be impeding his ability to acquire gainful employment without legally proving the reason he doesn’t deserve it. The word that comes to mind here is poppycock!

Prosecute thieves and those who commit fraud to ensure that you can tell future employers the information that they deserve to know. Then you can let those employers make informed decisions about who to let in their businesses.

Again, those who commit fraud aren’t first time offenders – they’re just getting caught for the first time and prosecuted. Do us all a favor and make sure people are prosecuted for their crimes.

Have you ever prosecuted someone for fraud? What happened?

Have you ever chosen not to prosecute someone for fraud? Why not?

You Are Always Leading by Example

If there is such a thing as good leadership, it is to give a good example.

– Ingvar Kamprad

If you know me or you’ve been reading my blog, you know how much I value this concept.

I’ve seen a poor example be the bad leadership to bring down many a company.

If you take a little extra cash out of the register, your employees will feel okay doing so, too. If you speak negatively about your customers, your employees will do the same. Are you a gossip? Expect your employees to become gossips as well.

It doesn’t matter how many inspiring speeches you give about doing the right thing and the amazingness of your company. Your word means nothing if your actions – which are all examples – are poor.

We all lead by example. Make sure yours is a good one.

Click HERE for another post on leadership.

Do you lead by a good example? How so?

Cooking the Books & Other Stuff I’ve Seen Lately

You wouldn’t believe what some people do. Well, I’m sure you would, but I’ve got to say that I’ve been seeing some crazy stuff these days.

In one case I’m working on, the guy “running the show” has been stealing everything but the robe off his cold grandmother.

Every time I think I’ve seen every possible type of fraud there is, I’m introduced to a new one.

So far due to the actions of one crooked CEO I’ve seen and experienced the following:

~ Cooked Books

~ 6 Million Stolen Dollars

~ A self dealing CEO setting up a new business and paying old vendors for support

~ Getting my access cut off internally despite my appointment by a court of law to be doing what I’m doing

~ Offloading merchandise that had “no value” and was therefore disappearing

~ Selling one company’s products through another company and brand, which is detrimental to the value of the original company

~ Literally, taking the cash from sales – taking the cash, like a petty thief!

~ Plans to remove computers and file cabinets to “preserve” records for tax purposes.

~ Destruction of papers and documents

Holy cow!

I can’t believe all that this crooked guy is doing. I’ve seen a ton of fraud in my day, but one person doing so many different things. If he put this much effort into running the business effectively he would surely be making as much. It’s just craziness!

Have you been at a job and experienced fraud? Share your story in the comments below.